<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
-- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
------------------------------------
-- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------------- -----------
Commission file number 0-10627
------------------------------------
NORTH COUNTY BANCORP
---------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
California 95-3669135
---------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
444 S. Escondido Blvd., P.O. Box 462990, Escondido, California 92025
---------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (760) 743-2200
---------------------------
- ------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
--- ---
As of August 6, 1998 the Registrant had 4,637,290 shares of no par value
common stock issued and outstanding.
<PAGE>
NORTH COUNTY BANCORP
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheet -
June 30, 1998 and December 31, 1997 2
Consolidated Statement of Income -
Three Months Ended and Six Months Ended
June 30, 1998 and 1997 3
Consolidated Statement of Cash Flows -
Six Months Ended June 30, 1998 and 1997 4
Notes to Consolidated Financial Statements 5
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 6
Part II OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 11
</TABLE>
1
<PAGE>
NORTH COUNTY BANCORP
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ -------------
<S> <C> <C>
(Unaudited)
ASSETS
Cash and cash equivalents:
Cash and due from banks $ 25,293 $ 24,262
Federal funds sold 17,300 4,000
------------ -------------
42,593 28,262
Investment securities:
Available for sale 17,725 17,544
Held to maturity 11,655 12,135
Loans, net 219,917 207,723
Other real estate owned 769 986
Premises and equipment, net 9,669 8,582
Accrued interest receivable and other assets 5,394 5,502
------------ -------------
$307,722 $280,734
------------ -------------
------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 94,476 $ 89,852
Interest-bearing 180,995 161,703
------------ -------------
275,471 251,555
Accrued expenses and other liabilities 2,279 2,377
Federal funds purchased and U.S. Treasury
demand note 2,201 1,194
Capital lease obligation 409 415
------------ -------------
Total liabilities 280,360 255,541
------------ -------------
Stockholders' equity:
Common stock, no par value,
Authorized, 10,000,000 shares;
Outstanding shares 4,637,290
in 1998 and 1997 16,058 16,058
Retained earnings 11,276 9,137
Unrealized loss on available for sale
securities, net of tax 28 (2)
------------ -------------
Total stockholders' equity 27,362 25,193
------------ -------------
$307,722 $280,734
------------ -------------
------------ -------------
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
NORTH COUNTY BANCORP
CONSOLIDATED STATEMENT OF INCOME
(Unaudited, in thousands except per share data)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1998 1997 1998 1997
------------ ----------- ------------ ----------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $5,827 $4,868 $11,185 $ 9,338
Investment securities 408 475 848 919
Federal funds sold 107 140 212 198
Deposits with other financial institutions -- 9 --- 9
------------ ----------- ------------ ----------
Total interest income 6,342 5,492 12,245 10,464
------------ ----------- ------------ ----------
Interest expense:
Deposits 1,470 1,472 2,873 2,715
Federal funds purchased and U.S. Treasury
demand note 12 16 20 48
Long term debt 14 61 29 144
------------ ----------- ------------ ----------
Total interest expense 1,496 1,549 2,922 2,907
------------ ----------- ------------ ----------
Net interest income 4,846 3,943 9,323 7,557
Provision for loan losses 450 283 1,040 618
------------ ----------- ------------ ----------
Net interest income after provision for loan losses 4,396 3,660 8,283 6,939
Other income 1,755 1,693 3,742 3,138
Other expense 4,207 4,012 8,419 7,694
------------ ----------- ------------ ----------
Income before income taxes 1,944 1,341 3,606 2,383
Provision for income taxes 805 528 1,467 920
------------ ----------- ------------ ----------
Net income $1,139 $ 813 $ 2,139 $ 1,463
------------ ----------- ------------ ----------
------------ ----------- ------------ ----------
Basic earnings per share $ 0.25 $ 0.19 $ 0.46 $ 0.35
------------ ----------- ------------ ----------
------------ ----------- ------------ ----------
Diluted earnings per share $ 0.24 $ 0.18 $ 0.44 $ 0.32
------------ ----------- ------------ ----------
------------ ----------- ------------ ----------
Comprehensive Income:
Net income $1,139 $ 813 $ 2,139 $ 1,463
Unrealized gains and losses, net of tax 6 61 30 27
------------ ----------- ------------ ----------
$1,145 $ 874 $ 2,169 $ 1,490
------------ ----------- ------------ ----------
------------ ----------- ------------ ----------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
NORTH COUNTY BANCORP
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited, in thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------
1998 1997
---------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,139 $ 1,463
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization of:
Office property and equipment 541 661
Deferred loan fees and costs, net (385) (147)
Investment premiums and discounts, net 108 55
Other 18 84
Gain on sale of other real estate owned (76) (377)
Provision for loan and lease losses 1,040 618
(Increase) decrease in interest receivable (147) 54
Increase in taxes payable 85 97
Decrease in accrued expenses (261) (78)
Increase in interest payable 112 262
Other, net 233 462
---------- ------------
Net cash provided by operating activities 3,407 3,154
---------- ------------
Cash flows from investing activities:
Proceeds from sales and maturities of investment
securities 6,683 8,860
Purchase of investment securities (6,492) (8,930)
Net increase in loans (12,989) (15,657)
Purchase of premises and equipment (1,628) (268)
Proceeds from sale of other real estate owned 434 1,491
---------- ------------
Net cash used in investing activities (13,992) (14,504)
---------- ------------
Cash flows from financing activities:
Cash payments on notes payable and capital lease
obligations (7) (7)
Net increase in deposits 23,916 23,265
Net increase (decrease) in short term borrowings 1,007 (1,264)
Net decrease in long term borrowings --- (1,591)
---------- ------------
Net cash provided by financing activities 24,916 20,403
---------- ------------
Net increase in cash and cash equivalents 14,331 9,053
Cash and cash equivalents at beginning of year 28,262 28,136
---------- ------------
Cash and cash equivalents at end of period $ 42,593 $ 37,189
---------- ------------
---------- ------------
Disclosures:
Total interest paid $ 2,810 $ 2,645
---------- ------------
---------- ------------
Total taxes paid $ 1,293 $ 842
---------- ------------
---------- ------------
Foreclosed real estate loans $ 140 $ 745
---------- ------------
---------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
NORTH COUNTY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying financial information has been prepared in accordance with
the Securities and Exchange Commission rules and regulations for quarterly
reporting and therefore does not necessarily include all information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles. This information
should be read in conjunction with the Company's Annual Report for the year
ended December 31, 1997.
Operating results for interim periods are not necessarily indicative of
operating results for an entire fiscal year. In the opinion of management,
the unaudited financial information for the three and six month periods ended
June 30, 1998 and 1997, reflect all adjustments, consisting only of normal
recurring accruals and provisions, necessary for a fair presentation thereof.
NOTE 2 - EARNINGS PER SHARE
Basic earnings per share (EPS) represents net income divided by the weighted
average common shares outstanding during the period adjusted retroactively
for stock dividends excluding any potential dilutive effects. The weighted
average number of shares outstanding for basic EPS was 4,637,290 for the
three and six months ended June 30, 1998 and 4,216,597 and 4,212,660 for the
three and six months ended June 30, 1997, respectively.
Diluted EPS gives effect to all potential issuances of common stock that
would have caused basic EPS to be lower as if the issuance had already
occurred. The calculation of diluted EPS assumes the issuance of 180,712 and
531,587, shares of common stock at June 30, 1998 and 1997, respectively, upon
the exercise of eligible stock options and conversion of the Company's
convertible subordinated debentures. The weighted average number of shares
outstanding for diluted EPS was 4,817,213 and 4,818,002 for the three and six
months ended June 30, 1998, respectively, and 4,745,175 and 4,744,247 for the
three and six months ended June 30, 1997, respectively.
5
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
North County Bancorp (the "Company") has one wholly owned subsidiary, North
County Bank (the "Bank"). North County Bank's operations are the only
significant operations of the Company. The accompanying financial
information should be read in conjunction with the Company's Annual Report on
Form 10-K for the year ended December 31, 1997.
Statements contained in this Report on Form 10-Q that are not purely
historical are forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934, including statements regarding the Company's expectations,
intentions, beliefs or strategies regarding the future. All forward-looking
statements included in this document are based on information available to
the Company on the date thereof, and the Company assumes no obligation to
update any such forward-looking statements. It is important to note that the
Company's actual results could differ materially from those in such
forward-looking statements. Factors that could cause actual results to
differ materially from those in such forward-looking statements are included
in the discussions below.
FINANCIAL CONDITION
Total assets of the Company increased $27.0 million or 9.6% to $307.7 million
at June 30, 1998, from $280.7 million at December 31, 1997. Gross loans
increased $12.4 million or 5.9% to $223.4 million from $211.0 million at the
end of 1997. Within the loan portfolio, real estate loans increased $3.5
million to $49.3 million, commercial loans increased $5.9 million to $117.6
million and construction loans increased $6.8 million to $17.2 million at
June 30, 1998. These increases were partially offset by a decrease in total
consumer loans of $3.1 million to $38.0 million. The Company continues to
experience poor demand for consumer financing primarily due to increased
competition from non-bank lenders as well as other financial institutions in
its market area. There was little change in the loan portfolio mix of which
real estate and commercial loans comprised 22% and 53%, respectively, at the
end of both periods. Construction loans increased to 8% of gross loans
compared to 5% at year end and consumer loans declined slightly to 17% from
19%. Deposit growth has outpaced loan growth and excess funds were placed in
Federal funds sold which increased $13.3 million to $17.3 million at the end
of the second quarter. Other real estate owned decreased $217,000 to
$769,000 during the first six months of 1998 as the Company foreclosed on two
properties with a total carrying value of $140,000 and was able to sell five
properties with a total carrying value of $314,000.
Total deposits at June 30, 1998 increased $23.9 million or 9.5% from December
31, 1997. This increase consisted of $4.6 million in noninterest-bearing
deposits and $19.3 million in interest-bearing accounts. In the
interest-bearing deposit categories, NOW accounts increased $5.1 million to
$41.7 million, savings and money market accounts increased $2.6 million to
$81.0 million, and time deposits increased $11.6 million to $58.3 million.
Total stockholders' equity at June 30, 1998 was $27.4 million compared to
$25.2 million at December 31, 1997, an increase of $2.2 million or 8.6% due
to earnings. The Company's Tier I leverage capital ratios were 9.20% and
8.76%, at June 30, 1998 and December 31, 1997, respectively. The Bank's Tier
I leverage capital ratios were 9.15% and 8.73% at June 30, 1998 and December
31, 1997, respectively. (See CAPITAL RESOURCES.)
6
<PAGE>
RESULTS OF OPERATIONS
SUMMARY
Net income for the six months ended June 30, 1998 increased $679,000 or 45.6%
to $2.2 million from $1.5 million for the same 1997 period. This increase is
attributable to a number of factors, the largest of which was an increase in
net interest income of $1.7 million or 23.4% to $9.3 million from $7.6
million last year. The provision for loan and lease losses increased
$422,000 or 68.3% to $1.0 million from $618,000 primarily due to loan growth.
Other income increased $604,000 and was offset by an increase of $725,000 in
other expense. The provision for income taxes increased $547,000 to $1.5
million from $920,000 due to an increase in pre-tax earnings of $1.2 million
and a slightly higher effective tax rate. Return on average assets and
average stockholders' equity increased during the first six months of 1998 to
1.48% and 16.20%, respectively, from 1.10% and 13.95%, respectively for the
same 1997 period. Basic and diluted earnings per share for the first six
months of 1998 increased to $0.46 and $0.44, respectively, from $0.35 and
$0.32, respectively, for the same 1997 period. The 1997 earnings per share
calculations have been restated to reflect a 5% stock dividend paid on
January 30, 1998. (See RESULTS OF OPERATIONS -- PROVISION FOR LOAN AND LEASE
LOSSES, RESULTS OF OPERATION -- NET INTEREST INCOME, and RESULTS OF
OPERATIONS -- OTHER INCOME AND EXPENSE.)
For the quarter ended June 30, 1998, the Company reported net income of $1.1
million compared to $813,000 for the second quarter of 1997, an increase of
$326,000 or 40.1%. The increase in second quarter earnings is primarily due
to increases in net interest income of $903,000 and other income of $62,000
which were partially offset by increases in the provision for loans and lease
losses of $167,000 and other expense of $195,000. The provision for income
taxes increased $277,000 to $805,000 for the second quarter of 1998. The
return on average assets and average stockholders' equity for the quarter
ended June 30, 1998 increased to 1.55% and 16.91%, respectively, from 1.19%
and 15.23%, respectively, for the second quarter of 1997. Basic and diluted
earnings per share for the second quarters were $0.25 and $0.24, respectively
in 1998, compared to $0.19 and $0.18, respectively in 1997.
NET INTEREST INCOME
Net interest income for the six months ended June 30, 1998 compared to 1997
increased $1.7 million or 23.4% primarily due to growth of 12.0% or $27.5
million in average interest earning assets which increased to $255.0 million
from $227.5 million. Interest income on earning assets increased $1.8 million
or 17.0% to $12.2 million. The growth in interest income was primarily due
to an increase of $1.8 million in interest and fees on loans. Although the
balance in Fed funds sold showed a significant increase at period end the
average balance for the first six months of 1998 versus 1997 increased only
$500,000 to $7.9 million and the average yield for both periods was 5.39%.
Average loans increased $30.9 million to $217.5 million in the first half of
1998 from $186.6 million for the same 1997 period. The average tax
equivalent yield on loans in the same time periods increased to 10.38%
compared to 10.11%. Interest on investments decreased $71,000 in the first
half of 1998 compared to 1997. This was primarily due to a decrease in the
average volume of $3.7 million to $29.5 million in 1998 from $33.2 million in
1997 partially offset by an increase in yield to 5.95% in 1998 from 5.73% in
1997. The tax equivalent yield on earning assets was 9.71% for the first
half of 1998 compared to 9.31% last year. The net tax equivalent interest
margin (net interest income as a percentage of average interest-earning
assets) was 7.40% and 6.74% for the six months ended June 30, 1998 and 1997,
respectively.
Interest expense increased $15,000 or 0.5% for the first six months of 1998
compared to the same period in 1997. The increase in interest expense
consisted of an increase of $158,000 in interest paid on deposits, partially
offset by a decrease of $143,000 in interest expense on other borrowings,
primarily long term borrowings. Average interest-bearing deposits increased
by $12.0 million to $170.5 million in the first half of 1998 compared to
$158.5 million for the same 1997 period. The average rate paid on
interest-bearing deposits decreased during this time period to 3.40% at June
30, 1998 compared to 3.45% for the same 1997 period. Average money market
and savings deposits increased $5.6 million to $78.2 million and the average
rate paid on these
7
<PAGE>
accounts increased slightly to 3.33% from 3.29%. During the same period
average NOW accounts increased $4.1 million to $40.1 million while the
average rate paid decreased to 1.35% from 1.43%. Average time deposits
increased $2.3 million to $52.2 million at June 30, 1998. The average rate
paid for these deposits decreased to 5.08% from 5.15% largely due to a
deposit promotion in the second quarter of 1997 in which the Company offered
a short term (seven month) certificate of deposit at 6.00%. At June 30, 1997,
the Company had $1.5 million outstanding in 9 1/4% convertible subordinated
debentures which were redeemed (at the Company's option) for common stock in
October of 1997. Two term notes for $1.6 million were paid in full during
the second quarter of 1997. Consequently, average long term borrowings for
the first half of 1998 decreased to $411,000 from $3.0 million for the same
prior year period. The average rates paid on total interest-bearing
liabilities were 3.43% and 3.59% for the first six months of 1998 and 1997,
respectively.
OTHER INCOME AND OTHER EXPENSE
Other income and expense increased $604,000 and $725,000, respectively, for
the six months ended June 30, 1998. The increase in other income is
primarily due to an increase of $652,000 or 169.8% in gains on loan sales due
to increases of $322,000 in gains on the sale of SBA loans and $383,000 in
gains on the sale of equity loans partially offset by a decrease of $53,000
in gains on the sale of Title I loans. The Company sold $2.6 million in SBA
loans in the first half of 1998 and sold none during the same period last
year. Title I and equity loans sold totaled $21.8 million and $12.8 million
during the first six months of 1998 and 1997, respectively. Other expense
consists primarily of salaries and employee benefits which increased $629,000
to $4.9 million, occupancy expense which decreased $10,000 to $1.6 million,
advertising and other public relations which increased $169,000 to $334,000,
professional services which increased $34,000 to $256,000, telephone expense
which increased $34,000 to $217,000, and supplies which increased $11,000 to
$165,000.
IMPACT OF YEAR 2000 ON COMPUTER SYSTEMS
The Company has recognized the challenges posed by the Year 2000 issues and
has completed preliminary work to inventory computer systems, software and
equipment containing embedded microchips, and has performed a risk
assessment. The Company has hired an outside consultant to further assist in
the identification, testing and evaluation of all systems, service providers
and vendors to assure Year 2000 compliance. An internal task force has been
established to work with the consultant in reviewing all computer systems and
equipment, project planning, risk management and contingency planning. The
Company is also assessing the potential impact of this problem on its
customers. To the extent that the problem is not successfully addressed,
consequences, the extent of which are unknown, could follow. The Company
does not believe that the costs of addressing this problem will have a
material effect on the results of operations. The Company anticipates
related expenditures of approximately $250,000 in 1998 and 1999.
PROVISION FOR LOAN AND LEASE LOSSES
The provision for loan and lease losses for the six months ended June 30,
1998 was $1.0 million compared to $618,000 for the comparable 1997 period.
The amount of the provision reflects management's judgement as to the
adequacy of the reserve for loan and lease losses and is generally determined
by the periodic review of the loan portfolio, the Bank's loan loss
experience, and current and expected economic conditions. The increase in
the provision for loan and lease losses reflects a provision of $490,000
during the first half of 1998 compared to $300,000 in the first half of 1997
to supplement the Company's Title I HUD reserve due to potential losses in
the Title I portfolio. Net charge offs increased to $780,000 for the first
six months of 1998 from $494,000 for the same prior year period. The
annualized ratio of net charge offs to total loans was 0.70%, 0.47% and
0.51% at June 30, 1998, December 31, 1997, and June 30, 1997, respectively.
The loan and lease loss reserve was 1.58%, 1.55% and 1.67% of total gross
loans at June 30, 1998, December 31, 1997 and June 30, 1997, respectively.
8
<PAGE>
Loans are charged against the reserve, when in management's opinion, they are
deemed uncollectible, although the Bank continues to aggressively pursue
collection. Although management believes that the reserve for loan and lease
losses is adequate to absorb losses as they arise, there can be no assurance
that the Company will not sustain losses in any given period which could be
substantial in relation to the size of the reserve.
NONPERFORMING ASSETS
The following table provides information with respect to the components of the
Company's nonperforming assets at June 30, 1998 and December 31, 1997 (in
thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ -------------
<S> <C> <C>
Nonaccrual loans:
Commercial $ 993 $2,163
Installment and consumer 377 858
------------ -------------
Total nonperforming loans 1,370 3,021
------------ -------------
Other real estate owned 769 986
------------ -------------
Total nonperforming assets $2,139 $4,007
------------ -------------
------------ -------------
Nonperforming assets to total
gross loans plus other real
estate owned 0.95% 1.89%
------------ -------------
------------ -------------
</TABLE>
The Company considers a loan to be nonperforming when any one of the
following events occurs: (a) any installment of principal or interest is 90
days past due; (b) the full timely collection of interest or principal
becomes uncertain; (c) the loan is classified as "doubtful" by bank
examiners; or (d) a portion of its principal balance has been charged-off.
The Company's policy is to classify loans which are 90 days past due as
nonaccrual loans unless Management determines that the loan is adequately
collateralized and in the process of collection or other circumstances exist
which would justify the treatment of the loan as fully collectible.
Impaired loans were recorded at $772,000 and $98,000 for commercial loans and
real estate mortgage loans, respectively, at June 30, 1998. The recorded
investments are stated net of reserves for loan losses of $112,000 and
$11,000, respectively. Impaired loans at December 31, 1997 were recorded at
$1.5 million and $468,000 for commercial loans and real estate mortgage
loans, respectively, net of reserves for loan losses of $130,000 and $21,000,
respectively.
LIQUIDITY AND ASSET/LIABILITY MANAGEMENT
The liquidity of a banking institution reflects its ability to provide funds
to meet customer credit needs, to accommodate possible outflows in deposits,
to provide funds for day-to-day operations, and to take advantage of interest
rate market opportunities. Asset liquidity is provided by cash, certificates
of deposit with other financial institutions, Federal funds sold, investment
maturities and sales and loan maturities, repayments and sales. Liquid
assets (consisting of cash, Federal funds sold and investment securities)
comprised 23.4% and 20.6% of the Company's total assets at June 30, 1998 and
December 31, 1997, respectively. Liquidity management also includes the
management of unfunded commitments to make loans and undisbursed amounts
under lines of credit. At June 30, 1998, these commitments totaled $42.2
million in commercial loans, $1.2 million in letters of credit, $14.3 million
in real estate construction loans, and $10.8 million in consumer and
installment
9
<PAGE>
loans.
In addition to loan and investment sales and deposit growth, the Bank has
several secondary sources of liquidity. Many of the Bank's real estate
construction loans are originated pursuant to underwriting standards which
make them readily marketable to other financial institutions or investors in
the secondary market. In addition, in order to meet liquidity needs on a
temporary basis, the Bank has unsecured lines of credit in the amount of
$13.0 million for the purchase of Federal funds with other financial
institutions and may borrow funds at a correspondent financial institution,
the Federal Home Loan Bank and the Federal Reserve discount window, subject
to the Bank's ability to supply collateral.
Asset/Liability Management involves minimizing the impact of interest rate
changes on the Company's earnings through the management of the amount,
composition and repricing periods of rate sensitive assets and rate sensitive
liabilities. Emphasis is placed on maintaining a rate sensitivity position
within the Company's policy guidelines to avoid wide swings in spreads and to
minimize risk due to changes in interest rates. At June 30, 1998
approximately 60% of the Company's interest earning assets have interest
rates which are tied to the Bank's base lending rate or mature in one year or
less. In order to match the rate sensitivity of its assets, the Company's
policy is to offer a large number of variable rate deposit products and limit
the level of large dollar time deposits with maturities of one year or
longer. In addition to managing its asset/liability position, the Company has
taken steps to mitigate the impact of changing interest rates by generating
non-interest income through service charges, offering products which are not
interest rate sensitive, such as escrow services and insurance products, and
through the servicing of mortgage loans.
CAPITAL RESOURCES
Stockholders' equity increased 8.6% to $27.4 million at June 30, 1998 from
$25.2 million at December 31, 1997. Net income of $2.1 million and an
increase in net unrealized gains on available for sale securities of $30,000
contributed to the increase in equity.
The following table provides information with respect to the Company's and
the Bank's regulatory capital ratios and regulatory minimum requirements:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, REGULATORY MINIMUM
1998 1997 RATIOS
--------- ------------ ------------------
<S> <C> <C> <C>
NORTH COUNTY BANCORP
Risk-based capital
Tier 1 11.01% 10.88% 4.00%
Total 12.27% 12.14% 8.00%
Tier 1 leverage capital 9.20% 8.76% 4.00% - 5.00%
NORTH COUNTY BANK
Risk-based capital
Tier 1 10.95% 10.85% 4.00%
Total 12.20% 12.10% 8.00%
Tier 1 leverage capital 9.15% 8.73% 4.00% - 5.00%
</TABLE>
Management anticipates capital expenditures of approximately $700,000
primarily for upgrades to computer and data communications equipment,
computer software and improvements to facilities during the second half of
1998. The Company has applied with the Federal Reserve System for permission
to establish a full service branch office located at Palomar
10
<PAGE>
Airport Road and Business Park Drive in the City of Vista, California. The
office, which will be a leased facility, is scheduled to open during the
first quarter of 1999.
PART II - OTHER INFORMATION
All items of Part II other than Items 4 and 6 below are either inapplicable
or would be responded to in the negative.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
North County Bancorp held its Annual Meeting of Shareholders on May 20, 1998,
at which the following nine directors were elected.
<TABLE>
<S> <C>
Alan P. Chamberlain Jack Port
G. Bruce Dunn Clarence R. Smith
Ronald K. Goode Raymond V. Stone
James M. Gregg Burnet F. Wohlford
Rodney D. Jones
</TABLE>
All directors are elected each year at the Annual Meeting and hold office
until the next Annual Meeting or until their successors are elected.
The following table describes the number of affirmative and negative votes
cast (largest tally) with respect to the election.
<TABLE>
<CAPTION>
AFFIRMATIVE VOTES NEGATIVE VOTES ABSTAIN
<S> <C> <C>
3,898,128 22,214 59,464
</TABLE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) None
(b) No reports on Form 8-K have been filed during the period, and no
events have occurred which would require one to be filed.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORTH COUNTY BANCORP
(REGISTRANT)
/s/ MICHAEL J. GILLIGAN Date: August 8, 1998
- ----------------------------------------- ---------------
Michael J. Gilligan
Vice President & Chief Financial Officer
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF INCOME FOUND ON PAGES 2
AND 3 OF THE COMPANY'S FORM 10-Q FOR JUNE 30, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 25,293
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 17,300
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 17,725
<INVESTMENTS-CARRYING> 11,655
<INVESTMENTS-MARKET> 11,706
<LOANS> 223,445
<ALLOWANCE> 3,528
<TOTAL-ASSETS> 307,722
<DEPOSITS> 275,471
<SHORT-TERM> 2,201
<LIABILITIES-OTHER> 2,279
<LONG-TERM> 409
0
0
<COMMON> 16,058
<OTHER-SE> 11,304
<TOTAL-LIABILITIES-AND-EQUITY> 307,722
<INTEREST-LOAN> 11,185
<INTEREST-INVEST> 848
<INTEREST-OTHER> 212
<INTEREST-TOTAL> 12,245
<INTEREST-DEPOSIT> 2,873
<INTEREST-EXPENSE> 2,922
<INTEREST-INCOME-NET> 9,323
<LOAN-LOSSES> 1,040
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 8,419
<INCOME-PRETAX> 3,606
<INCOME-PRE-EXTRAORDINARY> 2,139
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,139
<EPS-PRIMARY> 0.46
<EPS-DILUTED> 0.44
<YIELD-ACTUAL> 7.40
<LOANS-NON> 1,370
<LOANS-PAST> 0
<LOANS-TROUBLED> 5,023
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,268
<CHARGE-OFFS> 915
<RECOVERIES> 135
<ALLOWANCE-CLOSE> 3,528
<ALLOWANCE-DOMESTIC> 3,528
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>